Pri­vatBank spawns law­suits, shady power com­pany deal

Kyiv Post - - Business Focus - BY JOSH KOVENSKY [email protected] per­cent

Next month will mark one year since Pri­vatBank was na­tion­al­ized.

The na­tion­al­iza­tion sucked $5.6 bil­lion from Ukraine’s state bud­get — money used to plug the hole left in the bank’s capital by its for­mer own­ers, Igor Kolo­moisky and Gen­nadiy Bo­golyubov.

The De­cem­ber na­tion­al­iza­tion has spawned more than 400 sep­a­rate court cases, in Ukraine and as far away as Lon­don.

Along with broth­ers Ihor and Grig­ory Surkis, the bank’s for­mer own­ers — Igor Kolo­moisky and Gen­nadiy Bo­golyubov — have launched dozens of law­suits against the Na­tional Bank of Ukraine and Pri­vatBank, as well as an ar­bi­tra­tion case in Stock­holm.

The lit­i­ga­tion is cloud­ing Pri­vatBank’s fu­ture prospects, as is a shady busi­ness deal link­ing the bank’s for­mer own­ers and a close ally of Ukrainian Pres­i­dent Petro Poroshenko.

Mul­ti­ple Ukrainian news re­ports — sup­ported by mul­ti­ple sources within the bank­ing and en­ergy in­dus­tries — have ac­cused Bloc of Petro Poroshenko law­maker Ihor Kononenko of ar­rang­ing a deal by which he would ac­quire a num­ber of the coun­try’s re­gional power dis- 80 60 40 20 0 The na­tion­al­iza­tion of Pri­vatBank in De­cem­ber 2016 caused the lender's non-per­form­ing loan rates to spike, af­ter its for­mer own­ers Igor Kolo­moisky and Gen­nady Bo­golyubov left the in­sti­tu­tion with an es­ti­mated $5.6 bil­lion in un­paid, in­sider loans. Source: Na­tional Bank of Ukraine By Yuliana Romanyshyn, Kyiv Post trib­u­tors — or oblener­gos — from the Surkises in ex­change for ar­rang­ing that the Surkis fam­ily wins pos­i­tive court rul­ings in Pri­vatBank cases.

That deal’s value de­pends on one con­di­tion: that the gov­ern­ment in­creases en­ergy tar­iffs, pump­ing mil­lions of dol­lars more from Ukrainian en­ergy con­sumers to the re­gional dis­trib­u­tors, and the power plants that feed them.

Kolo­moisky de­nies any wrong­do­ing at Pri­vatBank, and says that a pres­sure cam­paign from the gov­ern­ment forced him to ask the state to na­tion­al­ize it.

Kononenko did not re­ply to mul­ti­ple re­quests for com­ment.

Pri­vatBank spokesman Oleg Serga de­clined to com­ment, call­ing it an is­sue for the cen­tral bank.

NBU Spokesman An­driy Kravets told the Kyiv Post that ap­pel­late court de­ci­sions in Pri­vatBank cases in­volv­ing the Surkis case had “vi­o­lated pro­ce­dural law” and that the courts “en­acted un­just de­ci­sions.”

“When state capital en­tered Pri­vatBank, the re­lated par­ties’ funds were con­verted into the bank’s capital, ac­cord­ing to the de­mands of the law (the bail-in pro­ce­dure),” Kravets wrote. “This means that these funds were put into the bank’s capital to min­i­mize the cost to the state of res­cu­ing the fi­nan­cial in­sti­tu­tion.”

Bail­ing in

Much of the lit­i­ga­tion in­volv­ing Pri­vatBank and the NBU re­volves around a De­cem­ber de­ci­sion on which por­tions of the bank needed to be bailed in.

The bail­ing-in process meant that cer­tain in­vestors took a loss in or­der to partly sta­bi­lize Pri­vatBank.

One well-pub­li­cized group con­sists of for­eign hold­ers of the bank’s Lon­donis­sued Eurobonds, around $600 mil­lion of which were bailed in as part of a pro­ce­dure un­der Ukrainian law.

The Eurobond hold­ers in­clude in­vestors that bought the bank’s debt, as well as par­ties that NBU of­fi­cials al­lege are re­lated to Kolo­moisky and Bo­golyubov.

That group filed two ar­bi­tra­tion suits against Pri­vatBank in Lon­don on Nov. 8, de­mand­ing $335 mil­lion. The cases could take years to re­solve. If suc­cess­ful for the bond­hold­ers, they would see the sta­te­owned lender pay out mil­lions to wealthy for­eign in­vestors, some of whom are con­nected to Kolo­moisky.

But the bail-in de­ci­sion’s most pow­er­ful ca­su­al­ties could be Grig­ory and Ihor Surkis. The pair have been as­so­ci­ated with Kolo­moisky, with Ihor own­ing a 24.6 per­cent stake in Kolo­moisky’s 1+1 TV chan­nel.

The two — along with other fam­ily mem­bers — were iden­ti­fied as re­lated par­ties by cen­tral bank of­fi­cials in ad­vance of the na­tion­al­iza­tion of Pri­vatBank.

That al­lowed the gov­ern­ment to con­vert their de­posits into the bank’s share capital at a time when $5.6 bil­lion had, at least on pa­per, dis­ap­peared from tax­payer’s pock­ets and from de­pos­i­tors who had kept their sav­ings in the Dnipro-based lender.

The Surkises im­me­di­ately filed dozens of law­suits, with dif­fer­ent mem­bers of the fam­ily fil­ing in­di­vid­ual cases to­tal­ing around $300 mil­lion, to retrieve their money.

Co­in­ci­den­tal tim­ing?

Like many other claims in the Ukrainian le­gal sys­tem, the cases moved slowly for the first few months af­ter their fil­ing.

But on May 17, a lower ad­min­is­tra­tive court or­dered that the NBU and Pri­vatBank pay Hr 1.1 bil­lion ($41.4 mil­lion) to the Surkises.

One week later, re­ports be­gan to emerge in the Ukrainian me­dia about a deal in­volv­ing En­er­gomerezha, an en­ergy com­pany con­trolled by the

Surkis broth­ers and Bloc of Petro Poroshenko fac­tion law­maker Ihor Kononenko.

The re­ports in­di­cated that the Surkises were sell­ing their stakes in a num­ber of re­gional en­ergy dis­tri­bu­tion com­pa­nies, in­clud­ing Lviv, Ternopil, and Prikarpat­tia oblener­gos.

Over the sum­mer, the Surkises got more pos­i­tive de­ci­sions against Pri­vatBank, cul­mi­nat­ing in a Nov. 8 ap­pel­late rul­ing in their fa­vor. The NBU told the Kyiv Post that it filed an ap­peal to the Up­per Ad­min­is­tra­tive Court, and is con­sid­er­ing sub­mit­ting a case to the High Coun­cil of Jus­tice.

Two days af­ter the Nov. 8 de­ci­sion, an­other re­port ap­peared in Ukrainian news web­site Ukrain­ska Pravda, claim­ing that the broth­ers had re­lin­quished con­trol of the Kh­mel­nit­sky, Kharkiv, and Myko­laiv oblener­gos to Kononenko.

If true, the Surkis broth­ers re­tain own­er­ship of Za­por­izhoblener­go, also partly con­trolled by the oli­garch Kon­stantin Grig­or­ishin. At one point they owned more than one fourth of all of Ukraine’s oblener­gos.

Olek­sandr Paraschiy, a Con­corde Capital re­search an­a­lyst, wrote in June when ru­mors about the Surk­isKononenk­o deal be­gan to emerge that, “it would be very neg­a­tive for the im­age of the cur­rent gov­ern­ment, as well as rule of law in Ukraine, if it’s proven true that some­body from Poroshenko’s en­tourage is go­ing to use his au­thor­ity to re­cover the lost money of the Surkis fam­ily (at the cost of the state bank) in ex­change for valu­able as­sets in the power dis­tri­bu­tion sec­tor.”

“If there’s any sil­ver lin­ing to this brew­ing cor­rup­tion scan­dal, then such an op­er­a­tion will make the re­cov­ery of bailed-in money much eas­ier for all the bank’s cred­i­tors, in­clud­ing its Eurobond hold­ers,” Paraschiy added.

Although nearly ev­ery per­son in­volved in ei­ther bank­ing or en­ergy that the Kyiv Post con­tacted said that they were aware that Kononenko and the Surkis broth­ers had cut a deal, not one was will­ing to go on the Since Ukraine's eco­nomic crisis be­gan in 2014, the Na­tional Bank has yanked 96 banks off the Ukrainian mar­ket - roughly half of the coun­try's en­tire bank­ing sec­tor. Source: Na­tional Bank of Ukraine By Yuliana Romanyshyn, Kyiv Post record about it.

One in­di­vid­ual close to the oblener­gos who spoke on con­di­tion of anonymity due to fear of reprisals told the Kyiv Post that Kononenko had es­tab­lished an of­fice in Kyiv to man­age the en­ergy dis­trib­u­tors. The Surkis broth­ers — who pro­vided their ex­per­tise on how to man­age oblener­gos at the be­gin­ning — had proved them­selves no longer use­ful, lead­ing to them be­ing cut loose.

“Some­thing went wrong,” said Olek­sandr Savchenko, a for­mer banker and ex-NBU economist who runs Kyiv’s In­ter­na­tional In­sti­tute of Busi­ness. “Or from an­other per­spec­tive, it could be an el­e­ment of earn­ing money.”

“Ev­ery (court) de­ci­sion costs money,” he added. “For us, as a rule, be­hind ev­ery rul­ing that’s made there is some sort of personifie­d ma­te­rial in­ter­est.”

The press sec­re­tary for Kh­mel­nit­skoblenerg­o hung up on the Kyiv Post when asked about the deal. Kharkivobl­energo and Myko­laivoblene­rgo de­clined to com­ment, while Cherkasy­oblenergo di­rected the Kyiv Post to a bal­ance sheet which showed the com­pany’s out­dated 2016 own­er­ship struc­ture.

Bloc of Petro Poroshenko law­maker Olek­sandr Gra­novsky, known for his vast con­nec­tions among Ukraine’s lawyers and judges, has been ac­cused of pro­vid­ing lawyers for the Surkises and pres­sur­ing judges in­volved in the case, is­sued a state­ment in re­sponse to ques­tions from the Kyiv Post over whether he was in­volved in the deal.

“I am not aware of any such deals and, as a re­sult, am tak­ing no part in them,” he told the Kyiv Post in a state­ment. “More­over, I am un­aware of ex­actly how I could take part in them, if I wanted to.”

He added: “I am ac­quainted with al­most all of the best lawyers in Ukraine, but none of them pro­fes­sion­ally de­pend on my opin­ion or ac­tiv­ity.”

Cash on its way

Mean­while, a po­ten­tial up­com­ing change to the coun­try’s en­ergy tar­iff struc­ture could make the oblener­gos much more valu­able.

The Na­tional En­ergy Reg­u­la­tory Com­mis­sion (NERC) is con­sid­er­ing whether to raise con­sumers’ electricit­y tar­iffs by 25 per­cent.

Es­ti­mates vary on how much of this money would go to the oblener­gos.

“If that is in­tro­duced, all the dis­tri­bu­tion com­pa­nies will be­come much more valu­able,” Paraschiy told the Kyiv Post.

An­driy Gerus, a for­mer reg­u­la­tor on the Na­tional En­ergy Reg­u­la­tory Com­mis­sion, ar­gued that while the tar­iffs would in­crease cash flows in gen­eral, the big­gest boon would be seen at the end point: the en­ergy pro­duc­ers.

“The money goes to dis­tri­bu­tion, they pay (state-owned en­ergy dis­tri­bu­tion com­pany) En­er­ho­rynok, and then they pay money to the (power) pro­duc­ers,” he said. “Now the dis­cus­sion is about mak­ing the pie into a big­ger one, so it tran­si­tions through and the pro­duc­ers get a big­ger piece.”

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